14.6 Monopolistic Competition

So far, we’ve concentrated on oligopolistic markets where the number of firms is fixed because of barriers to entry. We’ve seen that these firms in an oligopoly (such as the airlines in our example) may earn positive economic profits. We now consider firms in monopolistically competitive markets without barriers to entry, so firms enter the market until no more firms can enter profitably in the long run.

If both competitive and monopolistically competitive firms make zero economic profits, what distinguishes these two market structures? Competitive firms face horizontal residual demand curves and charge prices equal to marginal cost. In contrast, monopolistically competitive firms face downward-sloping residual demand ...

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